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Quick View: History is written by the victors – in this case, the Fed
Dan Siluk, part of Janus Henderson’s fixed income team, believes that Federal Reserve (Fed) Chairman Jerome Powell earned the right to take a bow at the recent Jackson Hole Symposium as inflation has fallen considerably without inflicting major damage on the labor market.
5 Sep 2024
6 minute read
6 minute read
Key takeaways:
- In echoing July’s policy decision, Chairman Powell all but confirmed that more balanced risk to the Fed’s dual mandate has opened the door for a September rate cut.
- By easing restrictive policy, the risks posed by a hard landing have diminished – a scenario that should be favorable for an extension of the economic cycle as well as risk assets.
- With the exact path and cadence of policy to be dictated by hard-to-forecast data, we believe active investors have an opportunity to potentially capitalize on market volatility to generate excess returns.
“History is written by the victors.”
Whether this phrase originates from George Orwell or Winston Churchill remains a matter of debate. However, what stands beyond discussion is Federal Reserve (Fed) Chairman Jerome Powell’s fair assessment of the U.S. central bank’s navigational prowess – after a few fits and starts – through the economic tempest stirred by the COVID-19 pandemic.
We view Chairman Powell’s speech at the recently concluded Jackson Hole Symposium as a pivotal moment in understanding the Fed’s thinking on the current economic landscape and the potential path forward for U.S. monetary policy. Amid a backdrop of significant economic recovery but also lingering challenges, Powell offered insights into the Fed’s strategy for balancing its dual mandate of promoting maximum employment and maintaining price stability.
The state of the economy and monetary policy
When acknowledging the progress made since the onset of the pandemic, Powell highlighted the sharp decline in inflation from its mid-2022 peak. Inflation’s subsequent downward path is a testament to the effectiveness of the Fed’s restrictive monetary policy.
Importantly, Powell also noted the current state of the labor market, which has cooled from its previously overheated condition but has done so without leading to a significant rise in unemployment – especially that caused by layoffs. This nuanced assessment suggests that the Fed views the economy as moving toward a more balanced state, with inflation nearing its 2.0% target while still exhibiting a strong labor market.
Future directions for policy adjustments
A key takeaway from Powell’s speech was the emphasis on the data-dependent nature of any future policy adjustments. This approach underscores the Fed’s commitment to responding flexibly to economic conditions, indicating that while interest rate cuts are certainly on the horizon (i.e., the path), the size and frequency (i.e., the pace) will be dictated by the data.
The chairman also cautioned that the adjustments to policy would be carefully calibrated to avoid undermining progress made toward price stability. As he has made clear in previous statements, the central bank head understands all too well the lessons learned from premature easing prior to inflation being fully tamed.
Implications for markets
We believe this speech has significant implications for financial markets. Powell’s cautiously optimistic outlook could provide reassurance to investors about the potential for a soft landing, where inflation is brought under control without precipitating a deep economic downturn.
The market’s initial response – from both an equities and credit view – seems to agree. The emphasis on data dependence, however, suggests that markets should be prepared for periods of ongoing volatility as policy adjustments respond to evolving economic developments.
Just as in 2022 and 2023 when rates markets were largely dictated by each month’s inflation release, the same can likely be expected for the remainder of 2024 and into 2025, with labor market data now being the fulcrum. Given the softer print for July employment and the recent downward revision of U.S. payrolls, the next important date on the calendar will be August payrolls, to be released Sep 6.
Conclusion
Mr. Powell’s Jackson Hole speech was a thoughtful overview of the Fed’s response to an unprecedented economic crisis and its plans for navigating the road ahead. While much remains uncertain, the Fed’s commitment to adapting its policy in response to current economic data offers a hopeful outlook for achieving sustained economic growth and stability.
Given the inherent challenges forecasters face in predicting economic indicators – especially labor statistics – market volatility is likely to remain elevated. While large price swings and greater dispersion present their own challenges, we believe these can present opportunities for active investors who can agilely navigate price fluctuations. As the economy continues to evolve, the Fed’s actions will undoubtedly remain a critical focal point for markets and policymakers alike.
There is no guarantee that past trends will continue, or forecasts will be realised
Past performance does not predict future returns.
Glossary
Economic cycle
The fluctuation of the economy between expansion (growth) and contraction (recession), commonly measured in terms of gross domestic product (GDP). It is influenced by many factors, including household, government and business spending, trade, technology and central bank policy. The economic cycle consists of four recognised stages. ‘Early cycle’ is when the economy transitions from recession to recovery; ‘mid-cycle’ is the subsequent period of positive (but more moderate) growth. In the ‘late cycle’, growth slows as the economy reaches its full potential, wages start to rise and inflation begins to pick up, leading to lower demand, falling corporate earnings and eventually the fourth stage – recession.
Monetary policy
The policies of a central bank, aimed at influencing the level of inflation and growth in an economy. Monetary policy tools include setting interest rates and controlling the supply of money. Monetary stimulus refers to a central bank increasing the supply of money and lowering borrowing costs. Monetary tightening refers to central bank activity aimed at curbing inflation and slowing down growth in the economy by raising interest rates and reducing the supply of money. See also fiscal policy.
Volatility
The rate and extent at which the price of a portfolio, security or index, moves up and down. If the price swings up and down with large movements, it has high volatility. If the price moves more slowly and to a lesser extent, it has lower volatility. The higher the volatility the higher the risk of the investment.
Disclaimer
Janus Henderson Fund Managers UK Limited was appointed as the AIFM of the North American Income Trust with effect from 1 August 2024. Prior to that date, the North American Income Trust’s AIFM was Aberdeen Fund Managers Limited and all information contained in this document should be considered accordingly
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5 Sep 2024
6 minute read
6 minute read
Key takeaways:
- In echoing July’s policy decision, Chairman Powell all but confirmed that more balanced risk to the Fed’s dual mandate has opened the door for a September rate cut.
- By easing restrictive policy, the risks posed by a hard landing have diminished – a scenario that should be favorable for an extension of the economic cycle as well as risk assets.
- With the exact path and cadence of policy to be dictated by hard-to-forecast data, we believe active investors have an opportunity to potentially capitalize on market volatility to generate excess returns.